Life insurance coverage can be an integral part of any good, solid financial plan. This is because the proceeds from a life insurance policy can be used for many different reasons by an insured's survivors, such as replacing lost income, paying off debts, and/or for paying off the funeral and other final expenses of the insured.
There are many different factors that come into play when choosing a life insurance plan. These will primarily include the type and the amount of coverage, as well as the entity through which the coverage is being purchased. This can also include whether or not the coverage is being purchased as an individual policy, or rather as a part of a group benefits plan.
For many individuals and professionals, being a part of a group or association means that there may be products available, usually at a discounted rate. This is the case with the AICPA or the American Institute of CPAs. This entity provides access to multiple insurance and other coverage products to its members, as well as to other qualifying family members.
To help you further understand more about the different types and purchasing life insruance coverage, look into our post on life insurance types for dummies!
The Federal Employee Group Life Insurance is the largest group life insurance in the U.S. The benefit covers over 4 million FederalEmployees. Understanding your options within FEGLI will allow you to make the best decisions for you and your family. This blog post will cover options for life insurance for federal employees.
FEGLI provides three options for participants. Employees automatically get enrolled in the basic option and have the option of enrolling in option B & C. You can opt out of the
basic option, however there are some nice advantages to the basic option. When participating in this option the Federal Government pays for a third of the cost while the employee pays for two thirds. Cost does not increase as you get older with the basic option.
The basic option allows you to have life insurance coverage up to your base pay, plus an additional $2,000. If for example your base pay is $50,000 per year, you can have up to $52,000 in basic life insurance coverage. Since younger and older employees pay the same amount for coverage, younger employees get an Extra Free Benefit. Federal Employees under the age of 35 get their basic death benefit doubled at no additional cost. Beginning with age 35, the extra benefit is reduced by 10% each year until the employee reaches age 45, when there is no longer any Extra Free Benefit.
Option B is a benefit that is completly paid for by the employee. You can choose to elect coverage anywhere between one up to five times your base bay. That means that a federal employee earning $50,000 per year can choose between $50,000, $100,000, $150,000, $200,000 or $250,000 of coverage. The cost of option B increases as you get older.
Option C is a life insurance benefit for your spouse or unmarried children under age 22. You can elect between $5,000-$25,000 in coverage for a spouse, and up to $12,500 in coverage for children. The cost of option C increases with age just like option B.
FEGLI lets you convert your policy to an individual policy when your group insurance ends, however there are some things you need to know. You have a 60 day window to convert the policy once a terminating event occurs. If you miss the window, you're out of luck. Additionally, you can't convert your policy to an inexpensive aaa term life policy, instead only more expensive cash value policies are an option.
FEGLI has a great calculator on their site which I used to create an example that can help you understand the cost of benefits. In my example, I am using a 50 year old employee earning $50,000 per year.
A 50 year old employee earning $50,000 per year could get the following coverage: $52,000 in Basic coverage, $250,000 in Option B, and $25,000 for a spouse, and $12,500 for children. Coverage for the employee him/her self would cost $90.43 per month, while the option C coverage would be an additional $10.20 for a total of $100.23 per month.
As this employee ages, the cost of coverage will increase significantly. At age 55 the same individual would be paying $163.70 per month. At age 60 cost would be $340.93 per month, and at age 65 total cost per month would be $399.65 per month.
Earlier we mentioned that a 60 year old employee would be $340.93 cents per month for $250,000 in coverage. An alternative would be to shop for your own individual term life policy, which would allow you to save money and lock in your monthly costs for a long time, instead of having your coverage increase every 5 years.
A healthy 60 year old could get the same $250,000 in coverage at $62 per month for a 10 year term, locking in the rate for 10 years, or a 20 year term for $113 a month, locking in the rate for 20 years. Ofcourse, your rate would be based on your health, but most people can save significantly by purchasing their own policy, then keeping their Federal Employee Group Life Insurance policy.
At ChooseTerm.com we specialize in life insurance for federal employees and helping Federal Employees figure out if they can save money by getting their own life insurance policy. Please call us or fill out our quote form and we can help you save money on your FEGLI benefits.
Adam and Bob were best friends since junior high school. They shared an apartment in college, majored in the same field, and even went to work for the same company. When they were in their mid-30s they came up with a great idea for a product that would become very popular and the two decided to venture out with their own business. They decided to form a partnership with each owning 50%. The business soon began to flourish.
Two weeks after his 47th birthday, the seemingly healthy Adam suffered a massive heart attack and died. Upon his death, Adam’s ownership in the company was transferred to his wife Cathy. Having known Bob for many years, Cathy left control of the company to him and the business continued to prosper.
Two years later Cathy met a very charming man named Donald and after a whirlwind romance the two were married. Donald became very interested in the stock in Cathy’s late husband’s business. Eventually he would begin having ideas about how the company could be better run. Although he had no experience to back his ideas, being a good wife, Cathy would make these suggestions to Bob. The relationship between the partners soon began to suffer from this tension.
Not long after Cathy and Donald’s 3rd anniversary Cathy was diagnosed with cancer and soon she also passed away. Like many people, Cathy had failed to plan properly for her future and under community property laws her ownership transferred to Donald at her death. Donald was now a 50% owner of the company with an equal authority in how the business was run. Bob and Donald rarely agreed on the operation of the company and although he had years of experience and knowledge far superior to Donald’s, Bob was unable to override Donald’s ideas. Time spent on these disagreements, dissatisfied customers and mounting costs would all prove too much for the company and on the 20th anniversary of Adam and Bob opening the doors of the company they would be closed for good as the owners filed for bankruptcy.
A very simple yet often overlooked strategy could have helped avoid this unfortunate end to the previously happy story. The Buy/Sell agreement is a legally binding clause in a partnership agreement that controls what happens if one of the partners dies or otherwise needs to leave the partnership.
Typically the agreement sets a price and gives the surviving partner the option to buy the deceased partner’s share from their estate. In the story above, this would have afforded Bob the opportunity to simply buy Adam’s ownership interest, allowing him to maintain full control of the business and avoid the other problems.
This strategy runs into difficulty at the time of the partner’s death if the surviving partner does not have sufficient capital to make the purchase. Key-man life insurance helps to solve this problem. With this product the business buys a life insurance policy, equal to the agreed upon purchase price, on the life of each of the partners with the other partner listed as beneficiary. Death benefit of the insurance is then used to pay the deceased partner’s estate and transfer ownership.
With the business listed as the owner of the policies, they are considered business assets and premiums are allowable business expenses. This allows the partners to successfully plan for the future of the business while receiving some valuable tax benefits as well.
Don’t get me wrong, I’m all for group life insurance. Its an easy, hassle free way to get some life insurance. Fill out some forms at work and boom, I’m covered, I can have peace of mind and not have to worry ever again...or do I? While group life insurance can be a good source for supplemental life insurance you shouldn't rely on it too much. In this blog post i’ll cover the limitations of having life insurance only through your employer.
When you buy group life insurance there is usually no medical exam required. In addition the pricing of your policy is not fixed. For someone in their 20s and 30s premiums can be inexpensive, however as you get into your 40s and 50s premiums can be significantly more expensive for group life insurance. In addition pricing is not based on your health. There may be smoker and non-smoker rates, but if you are healthy you can usually get better premiums with an individual term life insurance policy. Not only will the rate be better, but you can also lock in a rate for 20 or 30 years knowing that your premiums will not increase.
The biggest downside of group life insurance is that you are not in control of your own destiny. That means that your company picks the insurance company and also decides on things like conversion options. If you get laid off, fired, or quit your job you won’t be able to keep the same policy in place - you are no longer part of the group. In many cases you won’t have the ability to keep the coverage at all. If that is the case you will be left uninsured especially if you won’t have a new job right away, or your new employer doesn’t offer group life insurance options.
Some companies do allow conversion of your policy into an individual policy. However the downside is that there are usually limitations and you will see a big price increase from your group rate to an individual rate. In many cases you won’t be able to convert to a cheap term life insurance policy with level premiums, rather your choice will be an expensive whole life policy.
To illustrate this example I did some googling around the web for group life conversion options. I happened to stumble on the group benefits and conversion options of employees at the University of Southern California. In this example, UNUM provides the group life coverage and conversion options and allows converting to a one year term policy (where the rate increases each year) or a whole life policy. They include conversion rates - so let’s compare them to individual life insurance options. Let’s say a 40 year old male had a $500,000 group life insurance policy he wanted to convert. If he chooses the whole life options with UNUM, the rate would be a whopping $7,805 annually!! If instead he chooses the 1 year term option the rate would be $2,620! And that is for one year term where the rate increases each year.
By comparison a healthy 40 year old can get an individual term life policy for $500,000 with a rate lock for 30 years for anywhere between $600-$1300 per year depending on his health.
Conversion options for group life are extremely expensive and generally not a good deal. You are better off buying an individual term life policy and saving money.
Besides the limitations of leaving your job, or converting the coverage from group to individual, there are also coverage limits in a group policy. Typically your employer provides a certain amount of coverage such as one time or two times salary, and you can supplement with additional coverage. However you are limited to the total coverage that you can have.
Group life is a good supplement to have, however it is too risky to have as your only source of life insurance. Leaving your employer, rising rates, poor conversion options and not having control over the types of coverage and insurance company puts the employer in the driver’s seat.
Buying an individual term life policy as your main source of insurance puts you in control. No one can take that policy away from you, you can lock in rates, choose the company, and all at prices that are affordable.